Hog Spot Market Prices Not Strongly Associated with Production Contracts

Hog Spot Market Prices Not Strongly Associated with Production Contracts

Key, Nigel, Amber Waves

ERS researchers used farm-level data from the 2002 and 2007 Censuses of Agriculture to examine the effect of increasing use of hog production contracts on market prices, often referred to as "spot market" prices. Comparing the prices received by independent producers in regions of growing contract production with the prices in regions of shrinking contract production, researchers found no strong relationship between contract prevalence and spot market prices.

In recent decades, the share of hogs raised under production contracts has increased from 5 percent in 1992 to 67 percent in 2004. Under a production contract, contractors (meatpackers or integrators - companies that contract with many growers and collect the hogs for processing or marketing) typically provide feeder pigs, feed, and other inputs to farm operators who raise the animals to market weight. Contractors own the hogs and compensate farmers using a formula that often includes incentives for high feed efficiency and low death loss.

The benefits of production contracts may help explain their growing prevalence. Contracts offer lower income risk for farmers and enhanced control over product quality and flow for meatpackers. The transition to production contracts, however, has raised concerns about how spot market prices are determined for independent hog farmers - those not under contract.

Because contract producers do not sell the hogs they raise, the shift to contracting has meant a pronounced decline in the number of spot market hog sales. In theory, meatpacking firms could use longterm production contracts to "tie up" local production, thereby discouraging the entry of competitors in local markets. …

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